By Kevin Krolicki

DETROIT (Reuters) - To understand why critics say the market-based tax foreclosure system is failing in Detroit, drive up Desoto Street near the city's geographic center.

The street is a mix of older ranch-style homes, new construction financed by a local church and wide-open green spaces where homes have been demolished or burned down.

Fifteen vacant lots on the street were listed in the October auction by Wayne County officials after owners failed to pay taxes for the past three years. None of the lots sold at the minimum bid of $500.

But on Desoto on a recent afternoon, residents were not even aware their neighborhood had been on the auction block.

"It would be nice if someone would come in here," said Mary White, 74, who has lived in the house her late husband built on Desoto for 20 years.

"Right now though, people can't afford anything. And the city has to send workers out to keep it mowed."

Americans have grown used to the idea that Detroit -- a one-time industrial powerhouse -- is a dying city with unemployment of 28 percent.

Collateral damage could include a government foreclosure system rooted in the belief that markets will clear and buyers must rule.

A tax foreclosure auction last week in Detroit failed to sell more than 80 percent of the properties on the block.

County officials had no immediate estimate on how much the auction had raised to offset lost taxes. The immediate goal was to cover the cost of staging the event in a downtown ballroom.

Sales in Detroit's first 12 tax wards -- an area including the city's oldest neighborhoods -- raised just over $250,000 on almost 200 transactions, notes from the auction show.

"Public tax auctions are like eating Cheetos for breakfast. It fills you up but it's unhealthy," said Dan Kildee, treasurer of Genesee County near Flint, Michigan. "These auctions bring in some quick cash but they do nothing for blight."

Proponents of change say Detroit and other declining cities should scrap tax auctions, as Flint has done under a "land bank" program pioneered by Kildee and being studied elsewhere.

That approach sells more valuable houses through brokers to court new residents. Other land is allowed to revert to green space and growing community gardens or stitched together in larger plots for redevelopment.

Detroit's bonanza of annual sales favor absentee owners and risk deepening the city's growing vacancy crisis, critics say. Continued...